MCD SALES HUNKERING DOWN FOR WINTER

Takeaway:$MCD faces a difficult top-line outlook over the next 5-6 months

McDonald’s sales improved on a sequential basis, partly due to calendar shifts, in the month of August. The US number was in line with our estimate while APMEA and Europe exceeded and missed our estimates, respectively. We do not read much into this one-month sequential improvement in the headline numbers. From here, compares ramp up dramatically through February. The downside in this stock is limited, in our view, but patience will be required for meaningful upside to come about; we are staying on the sidelines until catalysts emerge.

“Every mile is two in winter.”

-George Herbert

Trend Still Corroborating Hedgeye Macro’s “Growth Slowing” Thesis

McDonald’s released August comparable restaurant sales growth numbers this morning. Versus consensus, Global, US, and Europe narrowly missed while APMEA posted a beat. We discuss these geographies in greater depth below. Given the significant calendar shifts that seem to have resulted in some distortion of the July and August headline numbers, we believe that looking at the average of the numbers for those months is useful when thinking about the underlying trend of the business. In all geographies, taking the average of July and August, and considering the resulting numbers versus prior trends, implies a continuation of slowing growth. Looking at the headline numbers on a month-by-month basis suggests a sequential recovery which, we believe, will not show up in the numbers from here on.

August was a “last chance saloon”, of sorts, for McDonald’s to post a strong sales headline. As we have written over the last few days, the coming dividend announcement offers management the opportunity to send a positive message regarding the state of the business but, looking at the compares MCD must lap from here suggests that it could be a long, harsh winter from a sales headline perspective.

United States

The US print came in at 3%, in line with our expectations and 10 bps below the Street, as breakfast contributed the results. Any mention of beverages was conspicuous by its absence, despite the continuing advertising focus. The outlook for MCD’s US business suggests that headline numbers may be depressed for the next six months as compares ramp up and traffic is flat (price running at roughly 3%). McDonald’s will likely struggle to avoid posting some negative monthly comparable sales numbers for the US over the next six months. As we wrote on 4/23/12, “The evidence suggests that beverages are increasingly becoming a less important part of the vocabulary from McDonald’s’ management team. With that in mind, foremost in our thoughts is what the company’s strategy will be to maintain top-line momentum over the next few months.”

Europe

Europe comparable restaurant sales grew 3.1% in August, missing Hedgeye and Consensus expectations by 50 and 20 bps, respectively, as positive results in the U.K., France, and Russia were offset by Germany and certain markets in Southern Europe. The Olympics had, as we wrote in our preview, a positive impact on sales but, going forward, the macroeconomic environment remains a concern.

APMEA

APMEA comparable restaurant sales grew 5.7% as strong results in Australia and China, along with the positive impact from the Ramadan shift, were offset by ongoing weakness in Japan. That APMEA was such an outlier to the downside in July, and to the upside in August, is likely due in no small part to the impact of the Ramadan calendar shift. The macroeconomic data in major APMEA markets continues to suggest difficult conditions for MCD and, taking the average of July and August comps, we believe that the Growth Slowing theme, articulate by the Hedgeye Macro team earlier this year, continues to manifest itself in McDonald’s sales trends in APMEA and elsewhere. We are not believers in any recovery narrative in MCD’s APMEA business from here. As the chart below indicates, compares step up meaningfully from here through January 2013.

Howard Penney

Managing Director

Rory Green

Analyst

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09/11/12 09:24 AM EDT

FX Of The Dollar

FX OF THE DOLLAR

CLIENT TALKING POINTS

A GAME OF CHANCE

Some liken the stock market to a Vegas casino and while comparison can be debated and argued somewhat, we would call the market a particularly unique game of chance. Chinese stocks go up and then down after making YTD lows, US stocks have 2 up days then one down day and oil is up +31% since late June. If you’re looking for some magical pattern to follow, good luck finding it. The market is being whipsawed around these days by Federal Reserve whispers and rumors about market participation and bond buying programs over in Europe. One thing we can assure you is that this is NOT what growth looks like. Anyone telling you that inflation = growth needs to take a few more Flintstone’s vitamins and reconsider their career.

FX OF THE DOLLAR

Pardon the pun, but let’s examine the US dollar for a moment. The falling dollar, perpetuated by Bernanke & Co., inflates asset prices like stocks and commodities in the short-term. In turn growth slows and begging bailouts soon follow when the S&P 500 starts dropping a few handles each day. Meanwhile, you have speculators driving gold up higher and higher based on Fed action (or lack thereof) and next time you’re at the pump, you see $5 a gallon gas - we had the misfortune of paying $4.35 a gallon in New Jersey yesterday. Drive up food and fuel prices enough and you’ll have a lot of supporters of a stronger dollar soon enough.

_______________________________________________________

ASSET ALLOCATION

Cash: UP

U.S. Equities: UP

Int'l Equities: Flat

Commodities: Flat

Fixed Income: Flat

Int'l Currencies: UP

_______________________________________________________

TOP LONG IDEAS

NIKE (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

TRADE: LONG

TREND: LONG

TAIL: LONG

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

TRADE: LONG

TREND: LONG

TAIL: LONG

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

“Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are even incapable of forming such opinions.” –Albert Einstein

STAT OF THE DAY

US August Budget Deficit Soars To $192 Billion, $1.17 Trillion In Fiscal 2012

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09/11/12 08:30 AM EDT

President Obama’s Reelection Chances

Perhaps the success of last week’s Democratic National Convention is rubbing off on the President. After a slight decline last week, President Obama’s odds of being reelected increased 80 basis points to 60.7%, levels we haven’t seen since early April. He is closing in on his all time high of 62.3% attained back in late March.

It appears President Obama is on the fast track to another four years in the White House according to the latest results from the Hedgeye Election Indicator (HEI). President Obama’s reelection chances jumped 80 basis points (0.8%) to 59.8% and is fast approaching his peak of 62.3% that occurred back in March. No one knows what the catalyst is, but several weeks of consecutive gains indicate Mitt Romney has his work cut out for him going into September.

Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.

Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection. The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.

President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.

American Institute of Certified Public Accountants holds its National Conference on Banks and Savings Institutions, with speakers including Fed Chief Accountant Steven Merriett; Office of Comptroller of the Currency Chief Accountant Kathy Murphy; and FDIC Chief Accountant Robert Storch, 9:55am

WHAT TO WATCH:

AIG shrs valued at $18b - ~553.8m shrs at $32.50 each - sold by U.S., converting 4-year bailout into profit for taxpayers

Morgan Stanley won dispute with Citigroup over value of Smith Barney, of which it owns 51%: N.Y. Post

U.S. trade deficit probably grew to $44b in July from $42.9m

Texas Instruments releases mid-qtr update post-mkt

Samsung’s request for judge to lift prelim. ban on U.S. sales of its Galaxy Tab 10.1 tablet computer opposed by Apple

Hiring plans among U.S. corps in 4Q little changed from previous 3 mos, ManpowerGroup said in employment index

EARNINGS:

United Natural Foods (UNFI) 7:30am, $0.51

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

OIL – so, Oil is only up +31% in basically a straight line since mid-June, and Bernanke will say there’s no inflation this wk; w/ unemployment and median incomes remaining a disaster, this is one of the biggest tragedies of the Qe experiment; what’s good for the few (stock market) is bad for the many (real-inflation adjusted consumption growth).

Soy Reserves Smallest in Four Decades After Drought: Commodities

Nuclear Repairs No Easy Sale as Cheap Gas Hits Utilities: Energy

Oil Supplies Fall to Five-Month Low in Survey: Energy Markets

Oil Trades Near Three-Week High on Outlook for Economic Stimulus

Corn Advances as Harvest Progress in U.S. Confirms Crop Damage

Copper Seen Declining on Speculation Two-Day Rally Was Overdone

Gold Advances on Outlook for Further Stimulus at Fed Meeting

Robusta Coffee Tracks Arabica as Investors Buy; Cocoa Advances

OPEC Sees ‘Abundant’ Oil Supply, May Cut 2013 Demand Estimates

Qatar Holds Out on Glencore Bid as Davis Heads for Xstrata Exit

Chemical-Tankers Seen Rallying 50% as Fleet Proves Busy: Freight

Sugar to Pile Up as Global Demand Stays Weak, Kingsman Says

Russia Volumes, LNG Cargoes to Weigh on Gas to 2013, SocGen Says

Talisman CEO Switch Speeds Up Sale Speculation: Corporate Canada

India’s Goa Bans Mining After Panel Pegs Loss at $6.3 Billion

German Next-Month Power Falls Before Court Ruling on Euro Fund

CURRENCIES

EUROPEAN MARKETS

SPAIN – not clear what Rajoy was thinking by telling the truth, but Spain is now on the tape opposing bailout conditions; that’s good for another lower-high (since March) in Spanish Equities (and the Eurostoxx50); $1.28 Euro isn’t good for German exports either.

ASIAN MARKETS

ASIA – USD down is all good and fine for short-term politics (Bush did the same using Bernanke), but it’s bad for the rest of the world via commodity inflation; this continues to slow Asian growth and you can see that in the 2 big Asian Equity markets (China and Japan) that continued lower last night (-0.7%) after their 2-day squeeze.

MIDDLE EAST

The Hedgeye Macro Team

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09/11/12 08:01 AM EDT

Correcting All Of This

This note was originally published
at 8am on August 28, 2012 for Hedgeye subscribers.

“My government, will correct all of this.”

-Stephen W. Kearny

General Stephen Watts Kearny was one of the central figures in mid 19th century Western American history. Albeit for very brief periods of time, he was the Military Governor of both New Mexico (1846) and California (1847).

The aforementioned quote comes from Chapter 12 of the most recent book I’ve been reading on the conquest of the American West, Blood and Thunder, where “On August 14th, 1846, two days after the Navajo raid on Las Vegas, General Kearny marched with his Army of the West into the town’s central plaza…” and proclaimed his mystery of ill-fated central planning faith.

Within 6 months (January of 1847), Kearny’s “government” was nowhere to be found as the dead (scalped) body of the Governor he put in place in New Mexico (Charles Bent) “lay naked on the floor in a congealed pool of blood.” (page 221) The risk management lesson here is one that is never the same, but usually rhymes – beware of short-term government promises.

Back to the Global Macro Grind…

Stock and commodity markets appear to have been promised that European and American central planners are once again going to provide them the elixir of a no-volume but “up year-to-date” life in Jackson Hole, Wyoming this weekend.

That’s all good and fine, until it isn’t. Super Mario Draghi just cancelled his trip to the central planning summer play-land of the modern American West, and the Gold price doesn’t seem to be pleased by that turn of events this morning – not one bit.

As a refresher on how the market’s game of front-running both the Fed and ECB works, both political pandering entities are charged with keeping market prices up through money printing, bailout promises, and currency debasement.

Here’s the update on what US Dollar Debauchery has done for this 30-day bull run in stocks and commodities (inverse correlations between USD Dollar Index and the big stuff people are speculating on):

Gold = -0.85

Silver = -0.87

Oil (WTIC) = -0.81

CRB Index = -0.74

CRB Raw Industrials Index = -0.79

SP500 = -0.83

European and Global Equities alike get even more pop on the Fed’s Qe rumoring with 30-day USD inverse correlations for the EuroStoxx600 and MSC World Equity indices currently running at -0.88 and -0.86, respectively.

So, your “governments” are going to “correct all of this” by attempting to convince you that asset price inflation (commodities in particular, because that’s what’s driven the beta of the equity indices) is growth.

*note to real-world consumer self: inflation is not growth.

Maybe that’s why old Chavez is having such a tough time in the Venezuelan national polls, falling behind Radonski for the first time in a long time by a fairly wide margin (47.7% to 45.9%) despite the Venezuelan stock market being up +153% YTD!

Pardon? You mean people aren’t as stupid as politicians think they are? You mean the stock market being “up year-to-date” doesn’t reflect the fully bought and paid-for political messaging of the common man’s economic health?

Venezuela, by the way, devalued its currency in the last year. See Darius Dale’s Chart of the Day for what looks suspiciously Weimar Republic, 1920s style.

Maybe I have this wrong. Maybe Americans are truly as dumb as the politicians who are making these short-term broken promises of “price stability, full employment, and economic growth”…

Maybe I don’t.

Now that 2 of the world’s Top 4 economies (China and Japan) have guided down their GDP growth expectations this month (Japan did last night), maybe someone sane out there is starting to figure this out too. The US Treasury Bond market certainly just did.

Looking at what’s happened to market prices in the last week isn’t the end of this story, but it’s certainly instructive:

US Treasury Yields have dropped -13% in basically a straight line (from 1.89% to 1.64% on the 10yr this morning)

US Stocks (the SP500 and Russell2000) have fallen from their mid-August highs to make lower-highs versus March

Asian Equities: China made a fresh YTD low yesterday (-16.5% since May); Japan = -12% since the March top

European Equities: DAX, CAC, IBEX – pick your index have all made lower-highs on lower and lower volumes

US Dollar Index = down -3% in August, from its top to bottom

I know, I know. This whole Currency Correlation thing doesn’t fit the Bernanke/Geithner narrative because someone in their group-thinking Keynesian business schools told them “correlation is not causality.”

Someone better tell that to the entire market that’s keying off the causality that is the latest rumor about what Bernanke does next then, because US Dollar bets (CFTC contracts) just went from +311,000 on the bull side in June to -132,000 on the bear side pre Jackson Hole.

Correcting All of This will be abrupt. What started as a localized grievance against money printing (late 2007) and bank bailouts (2008-2009) now moves to a national debate about the stability of your hard earned currency and long-term (inflation adjusted) economic health.

Our immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr Treasury Yields, and the SP500 are now $1640-1679, $112.28-114.26, $81.11-82.01, $1.23-1.25, 1.63-1.76%, and 1401-1419, respectively.

THE M3: WYNN MACAU; CHINA AUG LOANS

The Macau Metro Monitor, September 11, 2012

NO NEED FOR FRESH EQUITY TO FUND WYNN COTAI Macau Business

Wynn Macau vice chairman Allan Zeman said WYNN would fund its new Cotai project through debt and internal resources. The project is estimated to cost US$4 billion (MOP32 billion) and should take around four years to build.

Zeman, who heads Hong Kong-based Lan Kwai Fong Holdings Ltd, a company investing in entertainment, also said he would consider investing in a bar and restaurant strip in Macau if the right piece of land became available at a reasonable price.

CHINA NEW LOANS EXCEED ESTIMATES AS WEN COUNTERS SLOWDOWN Bloomberg

China new loans was the highest of any August on record. New local-currency lending was 703.9 billion yuan (US$111 billion) in August, easily surpassing the 600 billion yuan Street estimate.

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